In most cases, we unkill the thread so it stays open for comments, but do not turn off the rank penalty. Occasionally, though, we do turn it off. Some easy cases are when a good article has a bad title and people were flagging the title (solution: change the title and turn off flags), or when there is evidence of a flagging ring (solution: turn off flags and ignore future flags from the offenders).
The harder cases are posts like this one, where the community is divided on a political question, some want it on HN and others don't. In that case we usually stop short of overriding the rank penalty. The voting and flagging systems have been in a stable equilibrium for years, and we've learned that it's a mistake to fight that very much or very often.
But we do do it sometimes, I'd guess maybe 10% of the time (but haven't looked at the data). For example, sometimes an article is so substantive and otherwise so obviously a good fit for HN that it doesn't seem fair to the community to let the flags have their usual say. Sometimes a thread turns out to be unexpectedly high-quality and not a flamewar. And sometimes a story is of so much interest to the community that we couldn't stop it even if we wanted to (a recent example being the Strange Loop/Yarvin thing), in which case we turn flagging off for hopefully the best submission on the topic and treat the others as dupes.
In the end, there's no escaping editorial judgment, though not every HN user shares your positive view of it. We try not to over-exercise it, but never doing so would be suboptimal for the community. There's a tragedy of the commons paradox in there somewhere.
